Delusional Divestment

New York Mayor De Blasio has become the latest activist to join the divestment crowd that is attempting to discredit oil companies. People like the divestment crowd do a lot of foolish things but selling their stock in protest is more than just foolish, it is an act of economic ignorance.

New York has, according to reports, $5 billion in oil company stocks. Presumably these are part of the city’s retirement plan for employees. While $5 billion is a lot of money, it is not a significant amount in terms of the value of oil companies or the amount traded daily in their stocks. If the Mayor thinks that his stunt will somehow hurt the finances of major oil companies, he knows even less about market forces than a New York taxi driver. New York City’s retirement fund is currently under performing and is underfunded.

Selling stocks in protest as New York plans to do and as some universities have done will hurt them more than the companies whose stock is sold. For every seller there is a buyer, so the company whose stock is sold only sees a change in ownership. The seller may sell at a loss as well as incur other costs to complete the sale–transaction costs and the cost of less diversification. What happens to the proceeds of the sale? Since the motivation for selling is political and not economic, the seller is likely to purchase replacement stocks that also reflects political considerations. The chances are that they may not perform as well and may have a higher risk. If that results in a lower return over time, the beneficiaries of the fund—retirees or scholarship/financial aid recipients are the losers. In the case of New York, the Mayor is imposing a cost on pension fund participants so that he can participate in a campaign that will not achieve its objectives. New York City’s shift in focus from meeting or exceeding its return objective to political objectives will only lead to even worse performance.

As a campaigning strategy, divestment is fatally flawed. As Harvard economics professor Rob Stavins observed, “Divestment doesn’t affect the ability of fossil fuel companies to raise capital: For each institution that divests, there are other investors that take its place. As long as the world still continues to rely on fossil fuels, and consumes them at current rates, the companies that supply them will have a ready market for their products.” The world is not going to turn away from oil and gas anytime soon because there is no commercially viable substitute for a high density, abundant energy source that is reasonably priced.

Prof Daniel Fischel, professor emeritus of the University of Chicago, in a paper on the subject of divestment–divestmentfacts—wrote,” There is no basis to believe that divestment can affect the stock prices or business decisions of targeted firms. Moreover, there is broad agreement among financial professionals and academics that simple investment rules like divestment from fossil fuel companies cannot generate superior returns. Finally, divestment seems unlikely to affect the public debate or provide an effective tool even for those who strongly feel the need to address climate change.”

Instead of diverting investments from superior to inferior ones and engaging in frivolous campaigns, the mayor should solve the underfunding problem but not on the backs of workers and focus on improving the performance of the city’s retirement fund.